Should Your Graduate Get Private Student Loans for College?
For some people, college is the best time of their life. It’s a chance to make lifelong friends, get an education and help shape the future.
But it can also be a big financial burden. Between tuition, books, and room and board, the cost can add up quickly, and many people have to take out student loans to get the college experience. In fact, according to a report from Pew Research, approximately 37 percent of U.S. households headed by someone under the age of 40 presently have student loan debt.
The Office of Federal Student Aid suggests looking for applicable federal student loans before resorting to private ones. But, if your child doesn’t qualify for any aid from the federal government, private loans for college can be another option.
What Are Private Student Loans?
Private loans for college, sometimes referred to as alternative student loans, are those in which a private lender offers funding. The Consumer Financial Protection Bureau (CFPB) states these student loans often come from three sources:
- School Loans: Your school’s financial aid office may be able to offer loan programs, and they generally have fixed rates.
- State Agency Loans: Some states sponsor alternative student loans for those attending a state school.
- Bank Loans: Many commercial banks or credit unions have loan programs, but they usually require a co-signer.
How much an applicant can get for private student loans is based on credit, according to Sallie Mae, and having a poor credit history may result in higher interest rates. For this reason, if you decide your child needs private student loan help, it’s a good idea to shop around and compare rates from multiple lenders before signing any paperwork.
Pros of Private Student Loans
Getting private loans for college can enable your child to get an education. In addition to that, the other pros of getting private loans, according to the CFPB, are:
- If your child needs it, you can sometimes get larger amounts than you could with a federal loan.
- If you can be a co-signer and have good credit, you may be able to get lower interest rates initially (though not necessarily over the life of the loan).
Cons of Private Student Loans
While getting a private student loan can mean the difference between attending college and not, alternative student loans have some potential drawbacks you should be aware of. The Office of Federal Student Aid lists the following disadvantages of private student loans:
- Private loans generally have a higher cost than federal loans, and payments are often required while your child is in school.
- These loans may require a co-signer, which means someone else has to promise to pay if the student can’t.
- There are fewer repayment options for private loans.
- A student’s poor credit record could lead to a more expensive loan, since the applicant’s credit score is one of the factors that contributes to determining the cost.
- Private loans can have variable interest rates, meaning interest could increase over the life of the loan.
- Interest on private student loans is not tax-deductible.
When deciding which student loans to apply for, it helps to think long-term and consider both the positives and negatives. If you know what you are getting into ahead of time, it may help you make the right choice for both you and your child – and your financial futures.